EUR 850.00 For Business Accounts Only

Morningstar | TomTom Posts Mixed 2Q Results; Increasing FVE to EUR 8.50 and Changing Moat Trend to Negative

TomTom reported mixed second-quarter earnings, as top-line growth persisted in its location technology segment paired with flattish growth in the consumer segment. Profitability, on the other hand, suffered as the company looks to spend more on mapmaking efficiency after selling off its telematics division in the quarter. Considering TomTom’s near-term prospects in location technology and opportunities to win contracts for high-definition maps, we’ve increased our revenue forecast for the company over the next five years. We’ve also increased operating profitability expectations in the latter portion of our forecast, given synergies between standard-definition and HD mapmaking. As a result, we are raising our fair value estimate for the no-moat name to EUR 8.50 from EUR 8. Despite the adjustment, we have changed our moat trend rating to negative from stable given our belief that increasing competition will ultimately be detrimental to TomTom’s automotive and enterprise businesses, weakening the competitive advantage provided by the firm’s intangible assets. We think such effects will not be evident in the financial statements over our explicit forecast, given the length of OEM design cycles.

In the second quarter, TomTom reported total revenue of EUR 211 million, a 12% year-over-year increase. TomTom’s location technology was, again, responsible for the top-line growth: posting 25% year-over-year growth, as opposed to the consumer segment, where revenue declined 0.2%. In location technology, TomTom’s enterprise subsegment experienced the greatest year-over-year revenue increase of 34%, due largely to the company’s growing partnership with Microsoft. The automotive subsegment also did well, with top-line growth of 21% year over year, largely due to higher volume orders from existing clients. In the consumer segment, the 0.2% decline in revenue was better than expected as more older-generation personal navigation devices were replaced.

Profitability for the quarter decreased year over year as gross margins totaled 67% as opposed to 70% in the same period last year. We weren’t surprised by location technology’s decline in EBITDA margin over the quarter to 6% from 25% in the prior-year period, as increases in operating expenses were expected given plans to boost mapmaking efficiency.

Over the next five years, we think TomTom’s auto OEM contracts will decline as competitors like Google become more popular for built-in infotainment systems. We think Google’s place as the consumer favorite navigation app will force OEMs to choose TomTom’s competitor as infotainment systems adopt a more mobile interface. We also think that TomTom’s enterprise business is prone to significant risk from app makers building their own maps. For these reasons, we have updated our moat trend rating for TomTom to negative from stable. We are still maintaining our no-moat rating, however, given our continued belief that excess returns on invested capital will not be feasible – which we now believe will be even more difficult in the long term, given our new negative moat trend rating.